Tag Archives: Agriculture

article 3 months old

Brokers Not Chicken About Ingham’s Outlook

Poultry producer Ingham's posted a robust maiden first half and brokers suspect prospectus forecasts may be beaten.

-Investors should be mindful of the potential drop in volume growth in the second half
-Cost reductions to drive earnings growth as revenue slows in the second half
-Leading position in a rational Australian industry with high barriers to entry


By Eva Brocklehurst

Strong volumes characterised the maiden first half for chicken producer, Ingham's ((ING)). Brokers suspect, given the split in the first half:second half in the prospectus that the company is on track to exceed FY17 forecasts.

First half operating earnings (EBITDA) of $95.2m were up 9%, and 48% of FY17 prospectus forecasts. Poultry volumes were very strong, increasing 12.9%. Volume growth is expected to moderate in the second half with the cycling of EDLP (every day low prices) initiatives in the major supermarket channels.

Cost Reductions To Drive Earnings Growth

While there is upside to FY17 prospectus estimates of around 2%, Citi advises investors to be mindful of a second half drop-off in volume growth, and the competitive environment in New Zealand. The main drivers of a good second half result, in the broker's view, will be more cost savings and operating leverage from higher volumes.

Citi notes the poultry supply chain is sensitive to changes in demand and the initial spike in pricing in early 2016 produced some pressures that will ease over time. This results in the benefit being delayed to the second half of FY17, While poultry volumes were up 10% excluding ingredients, Citi estimates prices fell -5-7% in Australia.

In New Zealand. on the other hand. while there was a decline in poultry volumes a better sales mix led to pricing growth. Citi believes evidence of a successful lowering of costs is the key driver of the share price.

Earnings are envisaged tracking 4-11% ahead of prospectus forecasts and 2-9% of Morgan Stanley's estimates. The broker also expects cost reductions will drive earnings growth, as revenue growth slows in the second half. Management expects Australian volumes will be in line with prospectus forecasts, which implies growth will slow in the second half to zero from 15% in the first half.

Macquarie believes the company is well on the way to achieving, if not modestly exceeding, prospectus forecasts. Valuation is undemanding and the broker expects confirmation of the sustainability of margin improvements will provide a catalyst for the stock to re-rate. Australian earnings margins increased 50 basis points to 7.4% in the half.

Macquarie notes the company also appears to have managed the fall-out from strong demand in key lines. The company is reported to be still in negotiations with one key QSR (quick service restaurant) customer. Industry feedback suggests this is McDonald's. The outcome of negotiations are not expected to impact the second half but Macquarie expects it might impact FY18.

NZ Conditions Remain Tough

Macquarie also believes the challenging conditions in New Zealand will remain a drag on the second half. Nevertheless delivery on prospectus forecasts is not predicated on a material turnaround in NZ operations.

UBS notes market concerns around the risk of rising imports for New Zealand were somewhat alleviated, as exports to Australia were down year-on-year. The broker likes the stock as the company has a leading market position in a rational industry that has high barriers to entry and attractive returns. There is margin upside as well. The broker believes the current share price is undervaluing the medium-term earnings opportunity.

Credit Suisse notes the competitive dynamics are very different between Australia and New Zealand. Oversupply is the main problem in New Zealand, while Australia is a more meaningful business because of its larger size and being the major beneficiary of the company's efficiency programs. The company's major competitor is also following a similar strategic path, such as increasing automation and focusing production on certain states while rationalising it in others.

The strong result has increased the broker's conviction that surprises could be on the upside. Results also affirmed the broker's view of the longevity of earnings growth beyond FY17. Although mindful of the supply chain challenges and some increasing seasonality, Credit Suisse suspects there is enough benefit from the higher volume base and efficiencies to enable FY17 prospectus forecasts to be beaten.

While the broker suspects some may view comments such as "Australian volume growth is expected to moderate" somewhat negatively, this comment needs to be taken in context of the strong first half. There are some reasons for caution but Credit Suisse believes there are enough drivers of growth to mitigate concerns.

FNArena's database shows five Buy ratings and one Hold (Morgan Stanley). The consensus target is $3.72, suggesting 12.3% upside to the last share price. Targets range from $3.40 (Morgan Stanley) to $4.00 (Morgans, yet to update on the results). The dividend yield on FY17 and FY18 forecasts is 4.0 % and 6.0% respectively.

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article 3 months old

Less Buzz For Capilano Honey

First half results for Capilano Honey were subdued after years of strong earnings growth, as the company invests in new product.

-Stronger second half expected with greater contribution from manuka JV
-Margin improvement expected in the shift to higher value honey
-Yet, near-term growth likely to be constrained domestically


By Eva Brocklehurst

There was less buzz in Capilano Honey's ((CZZ)) first half, after years of strong earnings growth, as the company invests in new product. The result was clouded by a move to net pricing, which reduced rebates and overall revenue when compared to the previous corresponding half.

The company made a $2.1m profit on the sale of its bee-keeping operations. The company also incurred $1.3m in extra costs associated with the new honey product, Beeotic, a prebiotic honey. Still, initial sales of Beeotic to China helped boost overall sales to that region by around 87%.

The balance sheet was assisted by an equity raising and asset sales in the half and, in line with the board's policy of only paying annual dividends, no interim was declared.

Morgans expects a stronger second half because of the scaling of the Beeotic sales and a greater contribution from the joint venture in manuka honey. Because of lower sales and increased investment across the business, Morgans downgrades FY17 and FY18 net profit forecasts by -12.7% and -18.9% respectively.

The broker still expects solid earnings growth over the next few years because of the increasing demand from consumers for honey and the benefits from selling higher-margin honey products, as well as rising exports.

Morgans now values the stock at $18.95 a share, down from $23.50, using a blended valuation methodology and focusing on FY18 multiples. The broker applies a small discount to the stock, given it has a materially smaller market capitalisation with lower liquidity. The broker retains an Add rating.

Compared to peers, Morgans considers Capilano Honey is attractively priced. It is a household brand and a market leader in a high-margin, growth category. The broker also believes Capilano Honey warrants corporate appeal, noting the full price that Bega Cheese ((BGA)) is paying for Vegemite, a similarly well-known Australian brand.

Next Six Months Challenging

The first half result was marginally below Canaccord Genuity's expectations, characterised by greater competition in the domestic market and lower export sales. However, Canaccord Genuity believes longer term growth will be supported by the manuka joint venture with Comvita and by Beeotic.

Revenue growth was pleasing given the greater level of supply domestically, which also put more product in the hands of competitor Beechworth. Capilano Honey is envisaged maintaining its market share.

International sales were down 23%, affected by the exit from some low-margin industrial business. The company has plans to re-direct this product to branded sales, which the broker notes has been a successful strategy to shift the mix in the past. Margin improvement has been a factor in the continued shift in mix away from bulk products and the push into higher value honey.

Canaccord Genuity expects the next six months will be challenging from a growth point of view as domestic sales represent over 80% of revenue and competition is likely to increase. Longer term, the company is expected to benefit from its initiatives in export markets

The broker previously applied a premium to the stock but with near-term growth constrained, believes a market multiple is now more realistic. As the near-term outlook is benign the broker reduces its target to $17.23 from $20.22. Hold rating retained.

Forecasts for earnings per share in FY17 and FY18 are revised down -6% and -10% respectively. Should some of the growth initiatives materialise in FY18, the broker believes there is upside to its estimates, which are yet to include specific benefits from the joint venture with Comvita.

Canaccord Genuity (Australia) received fees as joint lead manager and underwriter to the entitlement offer from Capilano Honey in June 2016.

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article 3 months old

Potential To Boost Farm Animal Yields

Anatara Lifesciences will soon offer a treatment for meat animals such as cattle and pigs, designed to reduce gastrointestinal disorders and increase meat yield.

-potential solution to significant problem of antibiotic resistance
-global demand for meat expected to grow significantly
-potential human applications in IBD and IBS


By Eva Brocklehurst

Anatara Lifesciences ((ANR)) will soon be offering its first product to the market -- Detach -- a treatment for production animals such as cattle and pigs, designed to reduce gastrointestinal disorders and increase meat yield. The company filed for Australian approval of the product in October and expects to be selling it commercially to pig farmers in 2017.

NDF Research envisages significant upside for the company with an option granted last year to the animal health company Zoetis over a worldwide licence for Detach. The product's mechanism does not involve killing the pathogens directly, which makes it a potential solution to the significant emerging problem of antibiotic resistance.

The company is looking at human applications for Detach, including inflammatory bowel disease (IBD) and irritable bowel syndrome (IBS), that are in need of new anti-inflammatory approaches. NDF Research values Anatara at $2.22 as its base case and $5.94 as an optimistic case, using a discounted cash flow approach. The price target of $4.00 is around the midpoint of the valuation range.

How does the drug work? It uses a natural product called bromelain by harnessing the notable anti-infective properties of the substance. This is a protein digesting enzyme which is obtained from the fruit or stem of pineapples. Researchers over the years have identified numerous potential therapeutic applications in conditions as diverse as osteoarthritis, angina and even cancer.

One of the product specific, anti-infective properties arises from its ability to prevent the attachment of pathogenic gut bacteria to various receptors located on the intestinal mucosa. When unable to attach to these receptors such bacteria are rendered harmless and, as bromelain does not kill the offending bacteria, there is no opportunity for drug resistant strains to emerge.

Detach is a patented formulation of bromelain protease and, while NDF Research acknowledges this is far from novel, since the early 1990s no other company has advanced the use of bromelain in animal health in a serious way, so Anatara is considered a leader in the field.

Why this product interests cattle and pig producers is that it cuts the level of mortality and antibiotic use, which has demonstrable economic benefits. A field trial has signalled this product could lower the incidence of scour in post-weaning pigs by 40% as well as increase weight gain, while reducing antibiotic use.

Given global demand for meat is expected to grow significantly the over the next two decades, producers of cattle and pigs are expected to seek new tools to lower the rate of infectious diseases which do not involve antibiotics. Detach represents one such tool, NDF Research believes.

Anatara also envisages potential for partnering discussions around various human indications in 2017. The prevalence of IBD and IBS suggest a significant pay-off for the company should Detach be found to have utility in such a setting. NDF Research notes big pharmaceutical companies are seriously interested in treatments for IBD, a serious chronic inflammation of all or part of the digestive tract which is characterised by severe diarrhoea, pain, fatigue and weight loss.

The company is fully funded through to its first revenues, having raised $9m in a placement at $0.78 per share in July 2015. NDF Research believes the stock is undervalued on its numbers and expects Anatara to be re-rated by the market as further data emerges on the utility of Detach in pig farming and the deadlines for first regulatory approvals approach.

The researcher also notes that when Anatara Lifesciences listed on the ASX in October 2014, it was the third public company to have been involved in the development of bromelain as an anti-infective in animal health. NDF Research believes perseverance and investment in the project through all three companies by the developer, Tracey Mynott, should bode well for an eventual commercial pay-off for shareholders.

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article 3 months old

Treasure Chest: More Pain For Bellamy’s?

-Amongst mostly negative views on Bellamy's, Bell Potter remains relatively optimistic
-Goldman Sachs has returned with most negative view of all
-Buy rating reiterated for competitor a2 Milk

By Rudi Filapek-Vandyck

Citi analysts cut their price target to $3.75 while retaining a Sell rating. Ord Minnett analysts cut their target to $3.72 while downgrading the rating to Sell. Stockbroker Morgans is still prepared to keep a little faith and only cut its target to $4.75, accompanied by a Hold rating.

The failures and misses at former market darling and Tasmania's corporate pride, Bellamy's ((BAL)), have been widely reported and commented upon this month. The CEO is gone. The CFO has been demoted. A recalcitrant group of shareholders (read: Jan Cameron and friends) wants to drink the blood of the remaining independent directors on the board. And New Zealand partner Fonterra now has the ability to boycott a change in ownership, if it were to occur.

It wasn't that long ago, 2015 to be precise, when Bellamy's was among the undisputed champions in the Australian share market, but things have darkened swiftly. There has been very little joy, if any, for loyal shareholders in 2016. A resumption of trading in the shares in January, after a suspension of about one month, has seen the share price tank by close to 38%, from $6.50 to near $4.00.

Things can only get better from here, right?

Current shareholders might take heart from the fact that not all stockbroking analysts have turned downright negative on Bellamy's future. Morgans is not as pessimistic as Citi and Ord Minnett. Bell Potter is even prepared to see some positives: stabilising sales, new management and "issues" that are addressable, or so it appears. Bell Potter has retained its Hold rating and only reduced its price target to $5.63.

Not so the analysts at Goldman Sachs. While everyone else was busy responding to the company's market update, analysts at Goldman Sachs needed a bit more time to digest all the finer, and not so subtle, details of what exactly has been going awry at the embattled organic milk marketer.

Having taken more time to assess and re-assess, Goldman Sachs has now returned with the most bearish assessment in the local market, even beating Citi analysts who never had anything but a Sell rating on this stock since initiating coverage in 2016. Goldman Sachs analysts are of the view that investors should expect more negative news flow in the short to medium term. Rather than assuming sales are stabilising, as Bell Potter does, the analysts have positioned themselves no less than 40% below the company's downgraded earnings (ebit) guidance for this year.

Goldman Sachs sees further negatives from Bellamy's trying to clear excessive inventories, while it is noticeably losing market share to a2 Milk ((A2M)) and to Danone (Aptamil). Most of all, the analysts expect investors to take a negative view on the likelihood of a capital raising later in the year.

All in all, Goldman Sachs's new price target of ... drum roll... $3.40 suggests a lot more pain could be in store for shareholders hoping for the best. The rating has been cut to Sell from Neutral.

Note: the analysts at Goldman Sachs have grabbed the opportunity to reiterate their Buy rating for a2 Milk which, they note, doesn't have take-or-pay arrangements and continues to win market share.

Goldman Sachs's view on a2 Milk is not shared by everyone. In the FNArena database, only Credit Suisse agrees wholeheartedly, whereas Citi (Sell) and UBS, Deutsche Bank (Neutral) currently have a different view. CLSA also has turned ultra-negative on Bellamy's while staying positive on a2 Milk.

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article 3 months old

Can Ingham’s Deliver?

Brokers are crowing about newly listed poultry producer, Ingham's Group, but concede there are a risks investors should be wary of.

-Ingham's benefits from strong market share and high barriers to imports
-Risks in re-negotiating contracts with major supermarkets
-Demand expected to underpin double digit earnings growth


By Eva Brocklehurst

Poultry producer Ingham's Group ((ING)) has spread its wings to the ASX and several brokers have initiated coverage of the stock, noting its cheap price but highlighting the stock is not without risks.

In a market which is increasingly sceptical when it comes to IPOs (initial public offerings), Credit Suisse believes the stock will have to do more than just screen cheaply. It will need to deliver on prospectus forecasts and grow earnings thereafter.

The company will always face challenges in a competitive, mature industry, the broker acknowledges, but could surprise to the upside. The broker's conviction in this area is based on the strong market position, competent management and a plausible margin expansion program.

Ingham's is a vertically integrated poultry producer, in operation since 1918. Poultry comprised 87% of its FY16 revenue with the remainder being stockfeed sales. The company operates in the Australasian marketplace, which has a high restriction on competing imports and stiff quarantine procedures for disease mitigation.

This environment, as well as stable product demand, underpins broker confidence in the stock. The risks include changes to import rules, supply chain disruptions and changes to customer relationships. Ingham’s has long-term customer relationships and multi-year contracts with major retailers and quick service restaurants.

On the latter, Morgan Stanley is cautious. As contracts roll over there is a risk with re-negotiating with major customers. Woolworths (which the broker estimates provides 38% of Ingham's revenue) has invested $1bn in prices over the past two years, including over $50m in the chicken category.

Ingham's has been a beneficiary of this price investment via higher volume growth. While major contracts are in place until the end of FY18, the broker suspects, given Woolworths' strong bargaining position, that Ingham's may be forced to lower prices, effectively handing back recent gains.

While the valuation may be cheap, the broker emphasises that the earnings risk needs to be priced. Morgan Stanley prefers to assess valuation on an Enterprise Value/EBITDA (earnings before interest, tax, depreciation and amortisation) basis as the company has significantly more financial leverage versus its peers.

Ingham's is still in the early stages of cost reductions, including plant automation, labour productivity improvements, network rationalisation and procurement savings. Morgan Stanley estimates gross cost savings of $144m remain to be found. While cost cutting is the primary driver of margin expansion, operating leverage and premiumisation should also drive margins.

Morgans (not to be confused with Morgan Stanley) has few concerns, believing the leverage to attractive industry fundamentals is significant and the stock is undervalued. Consumer preferences for leaner meat means chicken is the cheapest and most versatile protein, accounting for two of the top five fresh products sold in Australian supermarkets.

As supermarkets continue to focus on the fresh category, and Ingham's has scale, it provides a degree of bargaining power when negotiating with supermarkets, in the broker's opinion. As an example, supermarkets funded the cut in the prices of BBQ birds and Ingham's was a beneficiary of the strong uptake since that time.

The broker expects demand should underpin double digit growth in earnings per share over the forecast period. Over time, the broker expects the stock to be placed in the ASX200. Still, Morgans acknowledges the key risks include the market power of the major retailers and the loss of a major contract.

Macquarie estimates 101% of average cash flow conversion in FY17, noting a dividend pay-out range of 65-70% of net profit is targeted. The FY17 dividend is expected to be franked. The broker does point out that the business is highly integrated and small changes or variations in upstream areas, such as breeder eggs, hatcheries or broiler farms can have a compound effect down the chain.

The company has highlighted that price competition in the wholesale market could persist for longer than expected, coupled with the fact its major Australian competitor (Baiada) is unlisted and, hence, has less pressure to deliver short-term results.

The low end of Macquarie's valuation range is broadly in line with the company's peer group and 10% above competitor Tegel. The broker believes a premium to NZ-listed Tegel is justified for a number of reasons, including relative scale and exposure to the larger Australian market, potential to narrow the margin differential and a lower reliance on export markets for future growth.

FNArena's database has three Buy ratings and one Hold (Morgan Stanley). The consensus target is $3.66, suggesting 15.9% upside to the last share price. Targets range from $3.40 (Morgan Stanley) to $4.00 (Morgans). The dividend yield on FY17 and FY18 estimates is 4.9% and 6.4% respectively.

Goldman Sachs, not part of FNArena's daily monitoring, has initiated coverage with a Buy rating and price target of $3.70. Underpinning Goldman's positive view is the anticipation of 12% EPS CAGR over the next three years, driven by the company’s "Project Accelerate" cost out program.

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article 3 months old

Hooked On Salmon

Leading Australian salmon producers, Tassal and Huon Aquaculture, are facing strong demand and rising prices for their fish in FY17.

-Global production of salmon constrained by sea lice, algal blooms and warm water
-Local demand rising amid strict import restrictions on fresh fish
-Significant margin expansion likely for both Tassal and Huon

By Eva Brocklehurst

Tassal Group ((TGR)) and Huon Aquaculture ((HUO)) are foremost in Australian farmed production of the increasingly desired pink-fleshed Atlantic Salmon. The Tasmanian based businesses – water temperatures in Australia restrict salmon farming to Tasmania - are benefiting from falling production in both Chile and Norway, which has driven international salmon price up 44% on average in 2016.

Sea lice, Norway's production headache, are likely to continue constraining global salmon production over the next 1-2 years, maybe longer. Algal blooms are the issue for Chile while domestic production is also constrained by warmer-than-expected water temperatures. Meanwhile, domestic salmon demand has doubled over the past decade and continues to grow as a result of the Asian influence on diets, the health benefits touted from eating oily fish and improving relative pricing.

Tassal is the larger producer and UBS initiates coverage with a Buy rating and $4.35 target. The company has invested heavily in order to double its productive capacity to over 30,000t per annum. UBS suspects the company will produce returns that will exceed pre-tax weighted average cost of capital from FY18 onwards and expects domestic salmon prices to increase further over the next 12 months.

The broker does envisage seafood will end up delivering less than 10% of the company's EBITDA (earnings before interest, tax, depreciation and amortisation) by FY19 without Tassel entering primary production of a white fish, which is considered unlikely. In Australia's top 10 seafood categories, barramundi is the only farmed fish other than salmon. The company's De Costi operations may increase processing capacity but this is also expected to add no more 1-2% to group EBITDA.

UBS would prefer incremental growth capital be used to expand production capacity where possible. De Costi was acquired in 2015 and operates two adjacent processing facilities, supplying seafood to food service, wholesale and supermarket customers.

Australia's Department of Agriculture has strict rules regarding imported fish, hence the vast majority of imported salmon arrives as portions and smoked product. Tasmania's marine leases are also strictly regulated and hard to establish. New Zealand can export fresh salmon to Australia but volumes are small and the particular breed is Pacific Salmon which is not considered a perfect substitute for Atlantic Salmon.

UBS believes the industry is set for low growth over the next four years. Over FY10-16 Huon Aquaculture increased its production by 89% while Tassal expanded by 40%. Based on marine lease opportunities and the lagged impact of a hot summer the broker forecasts industry output to fall around 4% in FY17 and growth at a compound rate of around 5% over FY16-20.

Ord Minnett believes the Tasmanian salmon industry offers attractive growth prospects from rising local consumption and the high barriers to entry. The broker suspects, if prices remain high, a normalisation of costs per kg could lead to significant margin expansion in FY18 and FY19. The broker's base case valuations for the two players suggest 20% upside for Tassal and 4% upside for Huon Aquaculture.

Ord Minnett forecasts Huon to grow its profit faster from a lower base but prefers Tassal, given its market position and stable returns. The broker initiates coverage on Huon with a Hold rating and $3.81 target and reiterates a Buy rating and target of $4.62 for Tassal. This broker also believes there is potential for significant industry margin upside in FY18 and FY19.

Average production costs are expected to rise in FY17, given the lag from poor growing conditions in FY16 attributed to warmer waters. Margin expansion in FY17 is likely to come from prices, which have caught up with conditions.

Credit Suisse, which also covers Huon, noted recently that the stock is leveraged to the domestic wholesaler channel where pricing is strong and the company had the advantage of re-directing 30% of FY16 volumes that were headed for export into domestic channels. Earnings per share growth is expected to be very strong the next three years. The broker has a Outperform rating and $3.75 target. Credit Suisse attributes a Neutral rating and $4.50 target to Tassal.

Tassal has two Buy rating and two Hold on FNArena's database. The consensus target is $4.41, signalling 11% upside to the last share price.

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article 3 months old

Select Harvests On Target For Record Production

Almond producer Select Harvests is on target for record production in FY17 and has flagged improved farm management practices.

-Food business to endure fall in earnings after record FY16, as lower almond prices are passed on
-Minor delays in projects not expected to affect FY17 earnings
-Stock considered fairly priced in the absence of a material rise in almond prices or larger crop


By Eva Brocklehurst

Almond producer Select Harvests ((SHV)) has confirmed expectations for improved yields and record production in FY17. Harvest volumes are expected in the range of 15,500-16,000 tonnes, broadly in line with broker forecasts. This implies 10-12.5% growth on FY16 production of 14,200t. The average yield per acre is 1.21/t, up from 1.15/t last year.

Spot pricing for almonds is indicated in the range of $7.50-8.00/kg. Furthermore, around 17% of the anticipated crop has been sold forward in this range. Development of new orchards is on track and Select Harvests is actively looking for further acquisitions of mature orchards and food businesses. After a record result in FY16, the food business is expected to endure a fall in earnings in FY17, as lower almond prices are passed on to customers.

A minor delay to the value-adding new facility and a nine-month delay to the commissioning of its biomass electricity co-generation plant, as well as recent storms, are not expected to affect FY17 earnings. The biomass electricity co-generation plant is now expected to be commissioned in the first quarter of 2018. This project will convert almond by-products such as hull, shell and orchard biomass waste into electricity, to be used to run the Carina West processing centre and deliver power to a neighbouring farm.

Excess energy will be returned to the grid and offset the company's other usage in Victoria. The project is expected to result in a reduction in the company's carbon footprint by 27%. Project Parboil, Select Harvest's value-adding facility, will increase the company's ability in paste making and improve efficiency, in order to grow the industrial and export business. Both projects are expected to contribute around $4m to EBIT (earnings before interest and tax).

Nevertheless, UBS notes the focus for investors remains fixed on the world's largest producer, California, where the crop harvest appears to be up 10-15%, as well as the speed of Californian shipments, up 40% year to date. At this stage the broker does not envisage a need to alter its assumptions or estimates. UBS retains a Neutral rating and $6.65 target.

Morgans upgrades forecasts as the company signals improved farm management practices. Despite isolated storms and hail across two properties in Victoria and South Australia, 2017 cropping averages have not been significantly affected. The company is also benefiting from materially lower water prices in FY17, compared with very high prices in FY16.

The broker considers the stock to have a portfolio of high quality assets and strong management of what it can control, investing in sustainable growth, productivity and risk management. There are barriers to entry given there are a few places in the world where almonds can be grown and there is a large capital cost and long lead time to maturity.

Morgans notes the stock is fairly priced, in the absence of the almond price rising materially above the current level, or the crop being larger than anticipated. The broker has a Hold rating and $6.90 target. The main risks for Select Harvest are considered to be weaker-than-expected US-dollar almond prices, a rising Australian dollar and/or rain at harvest (February).

A trough in the almond price has helped the share price, as near-term prospects improve, and Bell Porter had already assumed a yield slightly above the theoretical yield in FY17, given the below-theoretical result in FY16 and the biennial nature of the crop.

The broker, not one of the eight stockbrokers monitored daily on the FNArena database, lifts its target to $7.22 to reflect the uplift in average spot values since last updating on the stock. The broker's target price is weighted 50% to spot pricing. On current share prices the company looks to be balancing the positives on expanding its productive asset base against the prospect of subdued almond prices, as the expanded Californian acreage matures. Bell Potter retains a Hold rating.

Around 74% of the company's orchards are generating cash and its expansion plans mean production should increase over 23,000t by 2025, which is a 63% increase on FY16. The company expects to plant 1,000 acres in July 2017 and 2018, to be funded by a third party.

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article 3 months old

Graincorp Outlook Improves With Diversity

Graincorp's earnings performance is expected to improve in FY17. That said, the degree of upside is unclear because of delays to harvests.

-Increased competition in storage and at ports may hurt volumes and margins
-Malt business impresses brokers and oils expected to grow in FY17
-ADM stake envisaged limiting upside until offloaded


By Eva Brocklehurst

A large east coast harvest is under way and an improved earnings performance is expected from Graincorp ((GNC)) in FY17. Yet the degree of upside is unclear because of the delay to harvests and the extent to which farmers may hold back their grain because of low prices. Increased competition is another factor that may hurt the company's volumes and margins. On this basis, Morgans, for one, believes consensus expectations are too high.

The company's FY16 results were at the upper end of Graincorp's guidance and, despite earnings growth, it was a subdued year for the company because of a below-average crop and tough operating conditions in the oils business. The highlight for brokers was the performance of the malt business. Marketing disappointed, as intense competition for grain in eastern Australia, a larger world crop and cheaper ocean freight reduced Australia's export competitiveness.

The company did not provide specific guidance but did mention that FY17 would be a strong year, as a result of an above average east coast grain crop. Morgans expects the marketing business to continue being impacted by competition and a global oversupply of grain. On the plus side, the company continues to target a more balanced portfolio, with one third of earnings coming from each of malt, oils and storage & logistics.

The broker highlights that growth projects and cost reductions should set up the company for a big FY18, assuming a normal season. While the outlook is much better for FY17, and FY18 should benefit growth projects and de-leveraging, Morgans is a happy holder of the stock, but notes ADM's holding continues to overhang, given that company has declared it is a seller of the stock. This 19.85% holding is likely to crimp some of the upside and the broker retains a Hold rating.

On a seasonal basis, Macquarie observes the storage & logistics business is looking for a strong year in FY17. Weather is the key factor over the next month with fine conditions required for crops after a wet start to the season. The harvest is expected to be approximately three weeks late and the yield and quality remain uncertain. Marketing once again disappointed the broker, given the less competitive Australian grain and an oversupplied global market, and no relief is expected in FY17.

Structural change has increased, with heightened competition, and this reduces the margin upside relative to the company's prior peak levels, Macquarie observes. On a more positive note, the broker flags the malt business, which is benefitting from strong craft beer and whiskey demand. After a challenging FY16 the oils business is expected to show positive growth in FY17.

UBS upgrades forecast by 3-12% based on the stronger performance in the malt division. Results may have been ahead of expectations but the broker considers FY16 was relatively weak overall. Pressure was again on display in the grain supply chain and trading business, which has been impacted by three consecutive below-average east coast crops and increased competition for the grain receivals and at port.

The company has spent $540m on targeting an after-tax return of over 12%. While this is difficult to judge because of new competition and different grain carry and receivable periods, UBS believes the company is around $88m behind in its returns objective in terms of earnings. That said, NSW and Victorian state governments have begun improving grain rail lines but these will not deliver meaningful benefits until FY18-19.

The broker expects Graincorp to lift its sustainable return on equity and deliver free cash flow from FY17 as its expenditure on growth tapers off. While delays to the harvests are likely, UBS still believes the company will increase its supply chain market share as more grain is exported.

Morgan Stanley is quite positive and now expects the FY17 east coast harvest to be 22mt, which would be the third largest in history. Its Overweight rating reflects expectations that the company is at the start of an inflection point in earnings.

The broker notes $300m in growth expenditure will come on line in FY17 and these assets could contribute $40m to earnings, representing 16% growth on FY16 alone. Morgan Stanley believes the market is only partly incorporating the upside from cost initiatives, improvement in free cash flow and harvest upgrades in its estimates, although concedes that a solid confirmation in FY17 is still required.

While Deutsche Bank considers the results positive and ahead of expectations, the stock is now trading at a 4% discount to its valuation and the rating is therefore downgraded to Hold from Buy. This broker also expects the stock to be constrained in the near time by the perceived overhang of the ADM shares.

Deutsche Bank highlights ongoing diversification benefits from growth in the malt division and a return to growth in storage & logistics. Despite the efforts to diversify the base in recent years, Goldman Sachs emphasises that earnings remain highly leveraged to east coast Australian grain volumes. The broker, not one of the eight monitored daily on the FNArena database, has a Neutral rating and $9.09 target.

Credit Suisse upgrades malt forecasts, expecting profitability to be sustained, as well as east coast crop forecasts, while downgrading marketing profitability. The broker observes capital expenditure on oils and malt appear to be achieving satisfactory returns.

Credit Suisse estimates the combined winter and summer crop at 22.5mt. The broker assumes that country receivable market share is stable at 47% but underlying market share is expected to fall because of the continuing development of on-farm storage. There will also be new port competition in FY17 from the Quattro facility at Port Kembla. That facility is likely to take around 500,000t of exports.

There are two Buy ratings and four Hold on the database. The consensus target price is $9.08, reflecting 6.8% upside to the last share price. Targets range from $8.70 (Morgans) to $9.75 (Morgan Stanley).

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article 3 months old

Rain May Threaten Harvests But Supports Coal Prices

The wet end to winter looks to be continuing, threatening to spoil bumper crops while contributing in small part to the surging coal price.

-Bumper grain yields likely but at a time when international prices are very subdued
-Weather affecting coal production in China likely to be short term
-Still, China's production cuts and higher steel demand underpinning coal prices


By Eva Brocklehurst

Weather. Guaranteed to start a conversation anywhere in the world but nowhere more so at present than in the food bowl of NSW, the Riverina, where floods are the topic. South Australia has had its share, while an unusually rainy dry season has also confronted Northern Territory and Queensland. Moreover, with the bulk of Australia's coal mines located in NSW and Queensland any continuation of the extreme wet weather may affect production, underpinning surging coal prices.

September rain has drenched cropping areas, delivering in some cases four times the average for the month. While wheat and allied crops have had a strong start to the growing season it is now increasingly becoming a case of too much of a good thing.

If field drainage is good then prospects for the next harvest remain very good to outstanding, National Australia bank analysts observe, but yields may be affected in some areas and it remains to be seen how widespread is the inundation. Otherwise, there could be bumper yields, albeit at a time when international prices remain subdued. US wheat prices are observed to be the lowest in a decade, with prices suggesting higher closing inventories at the end of FY17 from abundant global production.

Agricultural commodities analyst at National Australia Bank, Phin Ziebell, expects the current year's wheat crop in Australia will be up 13.9%, nationally. Sugar and cotton production are also expected to be higher with cotton gaining from the extra water but with some uncertainty regarding a delay to planting times, at least in NSW's Riverina. On the cattle stations the re-stocking of national herds is expected to entail lower production of red meat.

On the subject of coal, any pullback in production as a result of the wet is expected to exacerbate higher prices. Both coking (metallurgical) coal and and thermal coal, have sparked attention of late as prices have surged on several factors. The analysts observe, from a low of less than US$70/t earlier this year, high quality coking coal prices have accelerated over recent weeks to hit US$200/t.

Bad weather in China has disrupted coal availability for the short term while the wet weather in key parts of Australia may have also affected production in recent months. Other factors supporting coal prices include reforms being conducted in the Chinese coal industry via production cuts, while higher construction and infrastructure spending has lifted demand for steel in China.

Adding this to the net increase in iron ore prices over 2016 and the analysts observe Australia's terms of trade are being well supported. The analysts expect a substantial rise in the terms of trade in the current quarter but then some retracement as the temporary supply side factors abate.

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article 3 months old

Consolidation Prospects Make Nufarm Appealing

Herbicide and pesticide producer Nufarm has a strong outlook for FY17, supported by cost savings and a better upcoming cropping season in Australia.

-Sustainable returns dependent on the market but further savings expected
-Acquisitions on the cards as plans to diversify continue
-Corporate appeal also noted, given key stake holders in the stock


By Eva Brocklehurst

Strong growth is expected for herbicide and pesticide producer Nufarm ((NUF)) in FY17, underpinned by cost savings, a better outlook in Australia, improvement in South America and lower FX losses. The company performed on cost reduction targets in FY16 with a very strong second half in South America. Nufarm reported an underlying net profit of $108.9m in the 12 months to July, down 7%.

Favourable seasonal conditions in Australia and a little self help should set up another year of profitable growth, in Citi's view. The broker remains a holder of the stock given the benefits of improving cash flows and earnings quality, as well as support from sector consolidation underway.

Citi considers the FY16 outperformance was mostly about timing and the measures to date are largely in the area of costs so sustainable returns are, to some extent, dependent on the market. Still, the broker is confident further savings can be generated beyond FY18.

Deutsche Bank was disappointed with the net operating cash flow in FY16 and, while the company's outlook lines up with its views, retains a Sell rating on the stock, which is trading at a 39% premium to the broker's valuation. The broker reduces FY17 earnings forecasts by 4-10% to reflect the net impact of lower earnings in Australia, Europe, seeds and higher net interest expense. This reduction is partly offset by higher earnings in the Americas and Asia as well as lower corporate costs.

The results trigger an upgrade to Add from Hold for Morgans. The broker considers the stock attractively priced for its growth profile. The first decent summer cropping season in four years is in progress in Australia while South America is also set for a bigger season. Hence, forecasts are upgraded.

The company remains on the look-out for consolidation opportunities to strengthen its product portfolio and also warrants corporate appeal, in the broker's view. Morgans highlights the fact that the chairman of Fuhua, one of China's glyphosate producers, has a 6.2% shareholding in Nufarm while Sumitomo Chemical owns 22.6%.

Consolidation prospects provide a supportive background, Macquarie agrees, and the potential for acquisitions or mergers is more relevant than ever. The broker suspects Sumitomo's blocking stake may be void at any bid above $11.65, well ahead of current share price levels. A third party approach that includes a reasonable premium could be relevant at current price levels.

On the other side of the coin, the company intends to participate in M&A in a targeted manner should appropriate acquisitions present. Macquarie finds it difficult to gain visibility on specific opportunities but notes the company has stated its intent to diversify in specific regions and crops.

The opportunities in industry consolidation are one of the reasons Credit Suisse upgrades to Outperform from Neutral. The broker adds $1 per share in value, assuming Nufarm can acquire an asset at good value. The broker observes there is $1.8bn in available credit but peak debt may reach $1.3bn. On that measure the company could have around $500m in debt-funded acquisition capacity. Nufarm has also indicated it is willing to partner to get the right deal.

Macquarie suspects the market was not keen on factoring in all the targeted savings but, with this result, believes expectations should now approach all management's targets. The broker forecasts $20m in incremental savings in FY17 and FY18. The result also suggests to Macquarie that the focus on higher returning products affected volumes, to the extent that a lack of fixed cost recovery meant margins declined.

Several brokers contend that management needs to seek a better balance of high-value, low-volume sales versus high-volume commodity sales in Australia. Macquarie believes a favourable seasonal backdrop should help in this regard.

Ord Minnett is one broker which notes the company has intentionally focused on higher margin products, and believes fine tuning of margins versus volumes needs to be done to lift utilisation rates and ensure profitability is maximised. The broker incorporates the full FY18 targeted savings of $116m into its model and includes a further $10m uplift in FY19, because of timing. On the broker's estimates management's key performance target of 16% return on funds employed should be reached by FY18.

The initiatives around improved performance, reduced costs and cash flow conversion are mostly sustainable and this underpins the stock's re-rating over the past 12 months, UBS believes. Execution on the strategy with seeds and expected cost reductions provide potential upside to the broker's forecasts in the near term.

UBS has a three-stage residual income model which indicates that the market is ascribing around 35% of the stock's value to medium-long term growth, in line with the industrials sector, ex financials. This is despite Nufarm having a better earnings outlook. The broker believes the Omega-3 strategy in seeds and greater depth in crop treatments are not captured in current valuation multiples.

FNArena's database shows four Buy ratings, two Hold and one Sell (Deutsche Bank). The consensus target is $9.02, signalling 0.8% in downside to the last share price. This compares with $8.06 ahead of the results. Targets range from $6.25 (Deutsche Bank) to $10.00 (UBS).

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